How helicopter money, spent wisely, can lift a large economy like China

More than a decade after the 2008 financial crisis, the world is still stuck in the long tunnel of economic pessimism: sluggish and uncertain growth, unemployment or underemployment, near-zero or negative nominal interest rates in advanced economies, widening gaps in income and opportunities, mounting private and public debts.

For several years after the crisis, the turbo-charged economy of China was a strong driver of global economic growth. That engine has slowed considerably – another negative factor. 

A financial crisis tends to cause not only economic setbacks but also serious social and political problems with long-term consequences. We are witnessing a retreat of democracy, a rise in populism and sectarian intolerance in many parts of the world.

The picture is grim, and all the measures taken so far have failed to turn the economy around. Repeated rounds of quantitative easing have been likened to pushing a string. Pursuing the same policy for longer is not likely to be meaningful, as shown by the Japanese experience.

Not only have the quantitative easing exercises not produced the desired results, they have led to other serious consequences. They have contributed to higher asset inflation and wealth ownership, setting the stage for the next great crisis. All the past major financial crises result from asset inflation gone awry.

So, are we running out of options? Not according to Adair Turner, former chairman of Britain’s Financial Services Authority. In articles and his book Between Debt and the Devil: Money, Credit, and Fixing Global Finance, he proposes that central banks create fiat money. To help an economy spend its way out of a recession, fiat money can take the form of “helicopter money” (distributed in cash to citizens) or debt monetisation (directly financing government deficit spending).

However, this monetary policy tool is a double-edged sword. While it could stimulate economic growth, strict discipline must be imposed to avoid the hyperinflation of Weimar Germany, Zimbabwe and Venezuela.

Even so, a small, open economy with no control over capital flows will face difficulties in implementing Turner’s ideas. Speculators might short the currency, which could bring about an effective devaluation, imported inflation and even a currency crisis. Fiat money is likely to work better in large economies or those with control over capital flows, like China and India.

But in the view of economist Hyman Minsky, state expenditure on job creation is better than helicopter money. His reason is that work somehow creates value and contributes to GDP. Helicopter money does not add any value, and in some cases, it is likely to cause inflation. However, this is unlikely if demand is depressed and the amount of helicopter money is not excessive.

Minsky’s recommendation works when employment is created for sectors like building new infrastructure or maintaining existing infrastructure, planting trees and cleaning up the environment. It is similar to the New Deal of Franklin Roosevelt.

In time, these activities will contribute directly and indirectly to state coffers. When the unemployed get jobs, their spending has a multiplier effect on the economy. Psychologically speaking, work gives a person a sense of dignity, reducing social problems like alcoholism, drug abuse and suicide. A workplace is also a place for social networking and learning skills.

The major structural problem with many economies is a slowdown in productivity growth. Market economies face not just a deficit on the aggregate demand side, but also a productivity deficit on the supply side. As economist Robert Gordon points out in his book The Rise and Fall of American Growth, the technological developments over the past few decades cannot catch up with past achievements.

In his estimation, the revolution in information technology can’t hold a candle to any one of the five great inventions that powered economic growth from 1870 to 1970: electricity, urban sanitation, chemicals and pharmaceuticals, the internal combustion engine and modern communication.

One sure way to boost productivity growth is to spend more on research and development. A sound basis for economic growth is technological innovation, and there is plenty of useful and value-adding R&D to carry out. Just think: green technologies to convert plastics into fuel, or bacteria to convert household and industrial waste into harmless raw materials.

With the democratisation of higher education, many countries have produced too many graduates. Many are employed in areas which they are not trained for (like university-trained engineers working in sales). R&D provides an avenue for them to contribute to society, and a challenging environment to continuously upgrade their skills.

In the context of economic conditions in advanced economies, Turner’s proposal merits serious consideration. When it comes to the use of printed money to finance employment, we favour an approach similar to the New Deal, and expenditure on R&D.

In terms of fiscal and monetary policies, the state can function like a reservoir or dam. In times of drought – like now – the reservoir should release water. In rainy seasons, the reservoir should store water. In good times, the state should soak up liquidity. In economic language, anti-cyclical policies should be adopted to improve macroeconomic stability.

Dr Lim Mah Hui is a former university professor and banker. and author of Nowhere to Hide: Great Financial Crisis and Challenges to Asia. Michael Heng is a retired professor who has held academic appointments in Australia, the Netherlands, and at six universities in Asia